Discounter lowers its July sales outlook but gives no explanation

Shares of Target
TGT, -0.58%
fell 6% to a 22-month low of $44.70 in early trading. The stock recovered a bit to trade at $45.05, with more than 11 million shares changing hands. But it was the main catalyst to an overall drag on the retail sector's key gauge, the S&P Retail Index See full story.

Late Monday, Minneapolis-based Target, a discounter that's fashionable with upscale shoppers, said July same-store sales are on track for 3% to 4% growth. Same-store sales are a key industry measurement of receipts rung up at stores open longer than a year.

The metric is closely-watched because it tracks sales movement in the stores that have an operating history, and strips out new store openings and other expansions, allowing industry watchers to better gauge the health of a particular retailer.

Less than two weeks ago, the company forecast sales in July could be higher by 4% to 6%. At the time, Target also spoke of its "confidence that" it would "meet or exceed" the average analyst earnings estimate of 69 cents a share for the quarter.

Target's latest disclosure calls into question some broadly-held assumptions about consumer-spending patterns. Analysts have expected consumers to put the brakes on their spending in the second half of the year, owing mostly to higher gasoline prices and rising interest rates.

Wal-Mart Stores Inc.
WMT, -0.37%
the world's largest retailer and Target's closest rival, has said for many weeks now that customers are combining trips to save money on gasoline, which has hurt sales.

But Target, whose main customers tend to have higher incomes and span a broader range of demographics than Wal-Mart's, was largely considered immune to much of that. Families with higher incomes tend not to alter their shopping habits because it costs more to get to the shopping centers and malls.

In its recorded message about the sales forecast, Target didn't offer any comments about why its results are lagging behind previous expectations and declined to provide additional details.

Bear Stearns analyst Christine Augustine said she was "somewhat surprised" by Target's news, considering that the retailer has been consistently delivering strong same-store sales this year.

By her reckoning, sales slowed down in the second week of July as people stayed home and watched the fighting in the Mideast coupled with early and aggressive back-to-school promotions at Wal-Mart. What's more, rising gas prices "might finally be having some impact" on spending, she said in a note to clients.

"We could be seeing a similar sales pattern to last November/December when Wal-Mart outpaced Target early but then Target recovered," she said, referring to the early start of holiday promotions at Wal-Mart. If that is the case, she's guessing that Wal-Mart's same-store sales will be flat in July.

Like Augustine, most analysts cautioned against reacting too swiftly to the announcement.

Adrianne Shapira, a Goldman Sachs analyst, called Target a "strong port in a choppy macro storm."

"While evidence of softening consumer backdrop begins to mount, we continue to believe that Target is relatively better positioned to handle this pressure given its staple merchandise mix and more affluent demographic draw," Shapira wrote in a note to clients. "Longer-term investors should view a market overreaction as a compelling opportunity to buy strong growth and returns at a steep discount."

That wasn't enough for analyst Bob Buchanan of A.G. Edwards. He urged his clients to hold on to Target shares, reversing his buy recommendation.

In a research note, he said he sees operational issues at Target that are creating "dull inventory turnover prospects" and hurting margins.

"Further," Buchanan wrote, "the weakening housing market and prospects of high oil and gas prices, along with other negatives, will pressure same-store sales."

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.